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The cost of compliance

Once again, a group of major banks face massive fines for illegal trading practices. And once again, a cynical public has its disillusionment with the business world reinforced.

It is in many ways ironic that those imposing regulation (the politicians) are even less trusted and respected than the industries they are regulating. Indeed, one risk is that they use regulation of others as a way to try and demonstrate their own integrity.

But according to a recent report by Deloitte, the massive costs of compliance are not especially due to external regulation. I am told (because I have yet to find the report) that their research suggests just 38% of those costs are due to regulation and 62% arise from internal rules and procedures.

The big question, of course, is how many of those internal rules and procedures are really necessary? How often are they challenged, reviewed, updated? In a fast-changing world, populated with new ideas, techniques and technologies, many rules or practices are outdated – and nowhere is this more evident than in the world of contracts. IACCM data shows the lengthening leadtimes for contract review and approval. We know that ‘compliance’ is a major (and growing) aspect of supplier selection and management. As a community, we have insight to the major causes of delay – but relatively few of us capture this data and challenge whether a) it is necessary or b) it could be streamlined.

Using the contracting process to test effectiveness and efficiency of business controls is a tremendous source of potential value-add. It illustrates the cross-functional nature of what we do and reflects our capacity as ‘agents of change’ rather than administrators of the status-quo.

The disappearing world of Procurement

Too many procurement groups are on a path to nowhere. They are missing the golden opportunities being created by today’s dynamic markets.

That is the conclusion I have to draw from the many conversations I have with practitioners, consultants, executive search firms and business executives. In a fast-changing world, the possibilities for growth are numerous. But in many cases, procurement professionals and their leaders are simply ignoring them because they do not fit existing paradigms, or they are too busy to pay attention to the warning signs.

For years, supply chain consultants and professional associations have been hammering on issues like compliance, category management, control – all based on the assumption that commoditization is the route to sustainable savings. This has led procurement into increasing isolation, making them masters of process, but disconnecting them from meaningful relationships with other business functions or suppliers. Indeed, many seem to glory in this isolation, feeling that it somehow confirms their objectivity and superiority as moral guardians of the business. They talk about key issues such as commercial skills and then delude themselves into thinking they are masters of these skills.

In reality, nothing could be further from the truth. Suppliers continue to see procurement as ‘the enemy’. Internal functions see them as an obstacle to good, balanced decisions. And markets are adjusting, to move beyond the pernicious effects of modern procurement practices. Suppliers have consolidated, eliminating competition in many industries. They are moving away from products towards services and solutions. They are shifting from unit prices to payment for results. These – and many other trends – are transforming the world of supply management and calling for skills that support integration, collaboration, overseeing outcomes and exercising judgment – attributes that are largely alien to the world that procurement leaders have created.

One would hope that professional leadership organizations would be assisting their members to change, providing a vision for the future. But instead, they often seem wedded to the past, calling for official status as ‘Licensed procurers’ or promoting even more draconian steps that would drive ‘savings’ or simply proclaiming the illusion that it’s only a matter of time before they ascend to the top table.

As enterprises disaggregate, needing ever more flexible and creative supply networks, this should be a golden age for those charged with selecting, forming and managing trading relationships. But as with every craft or trade of the past, relevance depends on the readiness to adapt. Right now, most procurement organizations are following a path that leads to more and more attrition as automation fulfills the roles that they perform and others step into the shoes they could be filling.

Those with vision are grasping that the future lies in the strength of relationships, in research and innovation, in creative ideas and insights – the attributes that machines find hard to replicate. It’s a world that excites IACCM and its members; its a world we must embrace, rather than retreat into the comfort of the past or find excuses to avoid.

If you are in Procurement, it’s time to rise up, to demand more, to assert your abilities and potential. The function is in desperate need of true leaders who act as drivers of change and creators of value. But to do that, you must challenge the status quo, the current mantras of control and compliance, and instead become enablers of transformation in trading relationships.

A challenge for skills

When they respond to IACCM’s talent surveys, 80% of contract and procurement professionals say they are confident that they understand the skills needed for the future. They also believe that they either have or can acquire those skills.

Are they right?

In a series of member meetings in Australia, the subject of skills has arisen on numerous occasions. There are several organizations – such as the Brooke Institute – that have undertaken significant studies in this area. All those studies suggest that skill needs are changing fast – and that the current practitioner community lacks the right profile for the challenges that lie ahead. IACCM benchmarking and skills assessments suggest they are right.

The nature of contracts and trading relationships is changing fast. We are moving to an increasingly complex environment where many projects and contracts are impacted by high levels of uncertainty or ambiguity. A growing number are performance or outcome based.

Complexity changes the sort of competency needed, from following process, ensuring compliance, obeying rules to instead making judgments. This means a need to be aware of the process and the rules and to understand how to work around or within them in ways that do not threaten success. It also demands a set of leadership skills and a readiness to engage with the outside world, to understand market trends and practices.

The problem we face is that the standard skills of following process, obeying rules and ensuring compliance will rapidly be automated. Right now, there is limited evidence that the practitioner community is acquiring the competencies needed for the future. But this is an area on which IACCM is working and will steadily introduce new approaches to training and skills development.


Risk management: time for a re-think

Over-hyped, inward-looking, of no practical use or value. That’s the conclusion any rational leader would reach in an objective analysis of the sprawling risk-management industry.

Recognizing and grasping opportunity lies at the heart of human and social development. Everything that can go right can also go wrong. Achieving balance is the core of commercial management and resides in attitudes, intelligence, adaptive design – not the mumbo-jumbo of self-serving specialists.

Life is not measured by slide rules. It is often unpredictable and we weather much of that unpredictability through exercising judgment. As a discipline, risk management tries to take us back to the days when medicine was performed by ‘balancing of the humors’. It served no practical purpose and often left the patient far worse off than they were before they exposed themselves to ‘the experts’.


Commercial power: who will own the interface?

Traditional sources of business value are under sustained attack, with current models often protected only by a flimsy regulatory environment.

As supply chains transform, commercial power and influence is shifting dramatically within industries, between industries and in many cases to start-ups with virtually no assets. Within 5 years, who will control your markets?

Consider for a moment how the early emergence of online retailers has led to mass aggregators of ecommerce such as Amazon, Alibaba and eBay. Companies such as Uber and airbnb are disrupting traditional value networks for transportation and hospitality. It is widely expected that power in markets for energy and water will steadily switch from utilities to service aggregators. And even in a highly profitable field such as pharmaceuticals, digital technologies will drive fundamental change in drug delivery.

The combination of networked technology and digitalization will continue to generate enormous change in product and service design and delivery. In long-established industries such as oil and gas and pharmaceuticals, top executives have already grasped that their key partners for the future are not those within their industry, but outside. They are forming new alliances and partnerships. They are shifting their attitudes on fundamental issues such as IP ownership or the use of power.

A common theme in all of this is that success increasingly depends on an organization’s ability to structure and manage complex (and shifting) networks of relationships. It is commercial acumen that lies at the heart of today’s winning business – and devising and executing the right forms of contract to define and hold those networks together.


Does a Contract Management function deliver much value?

Even as senior executives are embracing the importance of contract management competence, they are at the same time questioning the value of their contract management resources.

These positions are not incompatible. They simply reflect a sense on the part of many executives that the function should be doing more, that it should be more visible, that it should be able to describe and illustrate its value to the business. So the agenda is not to eliminate contract management; quite the opposite, it is to demand evidence from incumbent groups that they understand their role and are delivering against it.

Unfortunately, many contracts and commercial groups struggle with such a demand. They are busy; they do a lot of things. But they rarely measure their effectiveness in a way that would be meaningful to the executive agenda.

I receive many request from IACCM members who face questions of this type. In one recent case, I replied as follows:

Your exercise should begin with an analysis of corporate goals. What is it that your executives value? Clearly revenue and margin will be high on their list, but there are probably other key factors which contribute to that financial success. They may include things like speed of execution; corporate reputation (honesty, integrity, reliability); innovation. If you want to demonstrate value, you must link functional contribution to some or all of those goals.

You might look at some of the recent benchmark data we have produced and start to evaluate whether this is true in your organization. For example:

–     Organizations with a consolidated contracts function operate more efficiently than those with either fragmented or no dedicated CM resource. Obviously, contracts have to be managed by someone. The data shows that FTE heads are reduced by 35% when there is a consolidated function. VALUE: contribution to margin through reduced costs.

       A CM function reduces value erosion on contracts. It is typical for many agreements to either under-deliver on expected revenues or to overshoot on planned costs. Data suggests that an effective CM function reduces value erosion by 5 – 8%. This does not include its impact on contract or revenue growth – for example, through negotiated changes – but it does include disciplined change management and handling of claims and disputes. VALUE: contribution to revenue and margin through retained revenue and cost containment.

          The use of CM resources cuts cycle times and reduces the frequency of claims and disputes. Early engagement of CM in the bid phase of an opportunity typically reduces time to signature by 15% and reduces post-award claims and disputes by 24%, primarily through greater clarity of scope and goals, ensuring appropriate form of agreement and related terms and conditions. VALUE: increased speed to contract closure and revenue. Improved customer satisfaction and avoidance of reputation risk.

          In some organizations, CM is an active contributor to innovation. This depends on its leadership and objectives. The CM process generates extensive data, much of which indicates issues such as frequency of negotiated terms, frequency of claims, internal inefficiencies, accuracy of billing etc. Those insights can turn the CM function into a quality management function, generating ideas and initiatives for continuous improvement (e.g. revisions to standard terms, new commercial policy or practices, process simplification). VALUE: reduced costs, improved reputation, innovation in commercial terms or capabilities.

          Organizations with dedicated contract managers record higher levels of customer satisfaction and are more likely to earn repeat business. The data here is a little complicated and the results depend in part on the proficiency of CM and its measurements. It is, for example, important that CM is not a largely administrative activity and that its motivations are not to ‘nickel and dime’ the customer on every issue that arises. In those organizations where the function is measured on delivering successful contract outcomes, average NSI is some 6 points higher.

Moving forward, we see indications that an increasing number of customers will start to explore supplier competence and reliability as part of their sustainability evaluation. There is growing  awareness that competence in contract management is a strong indicator of reliability and ethical standards. As a reference document, you might read (and reference) the National Audit Office report on contract management of September 4th 2014.

Unfortunately, I cannot fix the problem that most contract management groups collect little or no performance data. All I can do is give those who are IACCM members some insights to the sort of results that their work may be delivering – and hope that they can use this to buy time and to show top management that they are at least ready to start the journey to value delivery. If they are not ready, the job will increasingly be passed to others.



Workflow – a critical ingredient

Anyone handling contracts on a regular basis understands that managing stakeholders is one of the biggest challenges. Contracts touch and affect many people within and outside an organization, but in quite different ways. Some view themselves as owners, others as users and still more as reviewers or approvers. And then there are those who may simply be affected in some way by the aims or purpose of the contract.

When you face such a broad array of people or functional interests, a well-defined and managed workflow is essential. Without it, risks are increased and quality and efficiency decline.

The problem facing many organizations is that the volume of stakeholders continues to increase. Factors such as growing professional specialism, increasing regulation and greater concern over reputational risk mean that cycle times are lengthening and internal productivity levels are under threat. In a competitive global market, these are not acceptable developments – so the choice becomes either to cut corners and take risks, or to define workflow and introduce effective management systems.

Workflow was the subject of a webinar that IACCM undertook recently with software provider Selectica. In the program, we reviewed some of the benchmark data that reveals a growing divide between the best and worst industry performers. For example, cycle times for contract negotiation vary by more than 300%. The volume of contracts handled by an individual contract manager shows an even wider difference. The overall resources administering contracts are also affected – and the best performers are freeing resources to undertake added-value and differentiating activities such as competitive research and data analytics.

In many ways ‘workflow’ is just another word for ‘process’ – or is at least a by-product of it. The problem for many organizations is that they still have not adequately defined their contracting process. It remains a set of unconnected activities, lacking clear ownership or accountability. This means that value is lost and risk increases – but these weaknesses are missed because, without a monitored process and supporting systems, the problems and their consequences remain invisible.



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